Dale Alcock Seminar review

I attended this seminar promoting their 'Turnkey' property investments.

Dale Alcock is a big Perth builder which builds many properties in fringe suburbs. However more recently they've gone into investments.

The seminar was held in a large regional WA city enticing people to invest in Perth.

The seminar gave the standard negative gearing spiel. The ideas was you'd sign up and they'd do the rest (including selecting the land and arranging finance).

It would be fair to say it was a fairly agressive neg gearing strategy. Borrow up to 105%, use interest only loans and rely on the large depreciation allowances of brand new properties. However in this case it was houses rather than flats.

The assumption on the hand-out was 10% capital growth and 2% CPI. The 10% was defended by a demonstration that prices in Perth had historically grown at about that rate over the last 30 years or so. However in most of those 30 years inflation was well over 2%, so real growth would have been less. Also the choice of properties in new fringe estates 30km from the CBD would not necessarily grow as fast as established suburbs closer in.

Each house on average would lose about $8000 pa before tax. Given the desirability of owning approx 6 houses to retire comfortably on, this would be a loss of approx $48000. To maintain full tax deductions, you'd need to be earning something like $110 000pa. And if you lost your job, you'd be in strife (as they admitted when they were asked). After tax you'd only be paying about $30-40 per house, but this would be very sensitive to interest rate increases.

For their initial tenants they suggest housing families who are waiting to have their own home built. But these may only stay 1-2 years. And when the estate is built out this market would diminish.

Overall I found it not for me (high cost and high risk). If I was going for growth, I'd be biased towards established homes in established suburbs near beach, river and/or CBD. However even people seeking a growth strategy would be wise to have second thoughts as one of the critical factors (choice of location) is limited to outer suburbs (unless you get them to put a house on your block, which I don't think would be as cost-effective as doing up an established home).

Peter

Spiderman said:

Overall I found it not for me (high cost and high risk). If I was going for growth, I'd be biased towards established homes in established suburbs near beach, river and/or CBD. However even people seeking a growth strategy would be wise to have second thoughts as one of the critical factors (choice of location) is limited to outer suburbs (unless you get them to put a house on your block, which I don't think would be as cost-effective as doing up an established home).

Click to expand...

Thanks for the info Peter.

Well done on your analysis.

I wonder why a builder would recommend new property only?

My first IP was in an area where there were- and still are- a lot of building blocks available. Guess what? There's been growth- but nothing near the growth in my own house.

hmm - interesting growth expectations for Perth....

The chart on page 99 of Steve McKnight's book 'From 0 to 130 properties in 3.5 years' has a different story over the last 20 years.

It's based on REIA and Reserve Bank data from 1982-2002.

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City......Ave 20yr growth.....Property to double $
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Perth..........7.54%...............9.55 years
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Cheers,

Aceyducey

Personally, I would never listen to someone who has a vested interest in selling anything. 99.9% of the time you know it will be vastly overpriced.

Aceyducey said:

hmm - interesting growth expectations for Perth....

The chart on page 99 of Steve McKnight's book 'From 0 to 130 properties in 3.5 years' has a different story over the last 20 years.

It's based on REIA and Reserve Bank data from 1982-2002.

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City......Ave 20yr growth.....Property to double $
---------------------------------------------------
Perth..........7.54%...............9.55 years
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Click to expand...

7.54% is a more realistic figure. However even this is comparing apples and oranges as they include sales in established suburbs (including those near beaches, schools, shops, river, etc). As you'd expect established suburbs to have higher land values and depreciated buildings, and thus better long-term capital growth, to expect even 7.54% on new estates is pushing it.

Some of the Alcock estates are near the beach so could do OK long term. But other facilities like public transport could be lacking. Owners might be happy to wait, but tenants want these things now, not in 2007, so they'll pick established areas first. If Thomas Stanley's Millionaires Next Door were living in Perth they'd select somewhere like Rossmoyne as living near good state schools are important. People can research schools in established suburbs. But with a new estate you don't really know.

But it gets far worse. Look at inflation. Alcock assumes 2%. P101 of McKnight's book give an average of 4.59% in Perth over 20 years, a period which includes both high and low inflation. But even now, 2% is too low and I would have been more comfortable with them using 3-4%.

The real growth for houses in Perth is 3.08% pa (7.54-4.59%). The 1982-2002 period includes booms in the late 80s and early 2000s and flat periods in the early 80s and early 90s. Thus it is probably fairly representative, though I'd prefer a longer measurement period. BTW most other capital cities are not dissimilar from Perth.

But 3% pa is a far cry from the 8% real claimed in the Alcock seminar (10-2%), especially when that 3% includes in its sample prime established suburbs like Applecross, Nedlands, Cottesloe and Manning whereas the Alcock estates don't.

At the seminar they were ready for objections, producing a slide with lower growth possibilities. For instance even with 6% you'd make $100k on a property over 10 years (as opposed to about $400k if growth was 10%).

But even 6% means 4% growth real which is above historic patterns for the city as a whole. It is especially improbable given that with the turnkey concept the investor need do little research and only has a limited number of outer suburban estates to build on.

Peter